Class Pictures

VideOvation is betting that today's TV generation will want even their school yearbook in video form

Back in 1985, while working as an investment consultant to the Rockefeller family in New York City, Paul Gruenberg got a phone call from an acquaintance in California. The friend had recently invested in a young company that needed money. Did Gruenberg have any interest -- or did he know anyone who might be interested -- in video "yearbooks"?

Gruenberg agreed to look over a package of material. But nothing he saw suggested that it could become much of a business. "There was no market information. No financial or operating information either. It was a couple of pages of seat-of-the-pants stuff." The tape was like a home movie. "A kid from Duke had taken a video camera and shot a bunch of friends wrestling and drinking."

He put the idea out of his mind. But a few months later a funding proposal crossed his desk that cast it in a different light. By coincidence, the proposal involved a publisher of high-school yearbooks. Gruenberg, who'd spent four years evaluating investment opportunities, was impressed with the characteristics of the industry, how steady and profitable it was. Three or four publishers, he learned, controlled about 90% of a $350-million market, much as they'd done for 20 or 30 years. As he saw it, "it was like an annuity." So long they produced a good product, they were set.

The yearbook deal didn't materialize. But it got Gruenberg scratching his head. Was there a similar annuitylike opportunity in video yearbooks? With the right product and the right approach to production and marketing, his gut told him, there was. "I remember going home one night and telling my wife that somebody was going to figure it out." By January 1986 Gruenberg had quit his job and was working out of his Manhattan apartment, mapping out how he would be that somebody.

Four years and $3.3 million later, Gruenberg, a 40-year-old father of three, thinks he has a grip on what it will take to be a leader in what he believes may be a $500-million industry within a decade. In many ways Gruenberg Video Group Inc., doing business as VideOvation and located in Philadelphia, is modeled after the print yearbook businesses he'd once marveled at. First, it tries to sell middle- and high-school principals on the curricular and promotional benefits that video yearbooks can bring to students and schools. Once a principal has signed on, a field producer works with a faculty adviser and a team of students, who are responsible for shooting the raw tape. With VideOvation supplying equipment, training tapes, and field support, the goal is to produce a 30- to 40-minute video that brings back the school year's memories: the faces, the sights, the sounds. VideOvation sells the edited tape (which includes a "time capsule" of world events) to students and their parents for $29.95 plus a $3 handling charge.

Last year the company generated $134,200 by selling an average of 100 units at 43 schools; it lost about $1 million. But Gruenberg believes things will change dramatically over the next two years as VideOvation signs more schools, sells more tapes, and fine-tunes its operating methods. In the 1991-92 school year, he hopes to sell an average of 286 tapes at 833 schools. If he does, he'll earn $1.1 million on $7.9 million in revenues.

More than 95% of the country's 18,000 high schools produce printed yearbooks, and this year some 11 million students (about 65% of the U.S. high-school population) will spend in the neighborhood of $20 to $30 to buy a copy of the 1990 edition. But Gruenberg doesn't think he'll have to siphon business away from any of the traditional yearbook publishers to be successful. Rather, he believes there's a new category of high-school memorabilia taking shape -- one that takes advantage of the unique characteristics of video.

Already, Gruenberg notes, video has become part of the daily diet of most U.S. teenagers; they watch videotapes of entertainers, sporting events -- you name it -- for several hours a week. Up to now not many high schools (fewer than 1,000) have produced video yearbooks. But as more and more do, Gruenberg thinks that significant numbers of students -- upward of 20% -- will want to own both print and video yearbooks. It's only a matter of time, he says, before the numbers are truly interesting.

From his office on the 54th floor of Rockefeller Center back in 1985, it was raw numbers that caught his eye: 3 million Americans finishing high school every year, mushrooming sales of home VCRs and other video products. His first business plan described three different scenarios for how fast the market would develop. The most conservative of them anticipated revenues in the third year of $13 million. As Gruenberg saw it, he'd be producing his new-style yearbooks in 1,475 schools, shipping more than 440,000 tapes, earning more than $1.6 million.

On the basis of his projections, Gruenberg managed to raise $1.2 million of initial financing from 15 contacts in the investment world. Originally, he had approached the top two print yearbook companies, Jostens Inc., in Minneapolis, and Taylor Publishing Co., in Dallas. But neither was interested in providing seed money. This left Gruenberg with some obvious challenges. How was he going to get things rolling? And how was he going to differentiate VideOvation from the folks who were already in the market as well as those who would follow?

Gruenberg didn't realize then that there were three separate parts to the marketing puzzle that needed to be worked out. First, he had to define the product. Second, he had to find ways to sign up the schools. And third, he had to figure out how to sell tapes. Each posed a different set of challenges. Only in the past few months has he felt that he has the basics figured out.

Defining the product: At the beginning, Gruenberg's idea was to have a school-based video product that was almost entirely created by the students. Instead of sending a professional video crew into high schools, like some mom-and-pop competitors were doing, he wanted to have the students, assisted by a faculty adviser, running the show -- deciding what belonged on the tape and figuring out how to get it. Students, thought Gruenberg, had a feeling for the school and the people that would be critical to the appeal of the product; not only that, their labor was free. He didn't want a formula (30 seconds of this, 60 seconds of that) governing how they operated. "The idea," Gruenberg says, "was to have videos that reflected all the different ways kids are growing up." The company was going to furnish video cameras, tapes, and information on how to shoot. A team or class of students would do the filming. Everything else -- the editing, the soundtrack, the in-school selling, and the distribution -- would be up to VideOvation.

But could it really work this way? Could students without any professional video experience generate tape that was (a) interesting and (b) technically good enough to be edited without enormous amounts of labor? Gruenberg tested the idea at 11 schools in New England and the Midwest in 1987 and found, to his dismay, that the answer was no. "The early footage was a disaster," Gruenberg recalls. The cameras bounced up and down and meandered aimlessly; the content was often frivolous. Gruenberg recognized right away that his notion of the product had to change. "We had to teach students about video, or else we'd always be spending too much time on the back end of the process." In essence, they had to create a curriculum and a format for making the videos.

Today Gruenberg thinks he has a first-rate system for introducing students and faculty advisers to video. It didn't come cheaply. The company has invested more than $100,000 to produce a series of 15 video lessons designed by Howie Masters, a former producer and director of ABC's "Good Morning, America." (An earlier effort to create a written training text proved a total waste, notes Gruenberg; nobody read it.) The lessons begin simply (how to use the camera, how to shoot close-ups, how to use microphones and lights) and move along to more advanced topics (how to plan stories, how to review and select the best footage). To manage the process of assembling tapes, VideOvation has created a 19-segment format that's synchronized to the lessons. For each segment -- fall sports, for example -- students get simple instructions for what to keep in mind; they also get periodic deadlines for getting their cassettes back to the editing studios at VideOvation.

To differentiate itself from most of its competitors, VideOvation is attempting to position its program as a curricular tool as well as a product. Every school is assigned a field producer, shared by 10 to 20 schools, who assists students and faculty advisers on technical issues. Unlike field staff at other companies, whose main role is to sell, VideOvation's people have all studied filmmaking or video broadcasting in college, Gruenberg says, and have at least five years of professional experience. Obviously, this boosts the company's front-end costs: on top of the equipment, these personnel costs add $1,000 per school. But Gruenberg feels it's worth the money for at least two reasons. First, he thinks it helps the company control production costs and assure quality. And second, it becomes a selling point with principals who, he argues, in times of budgetary pressure seek cost-effective ways to enrich their school curricula.

Signing up schools: When he began, a more wide-eyed Gruenberg thought that lining up a few hundred high schools would be a walk in the park. After all, he wouldn't be asking principals to spend a dime (the students or their parents would do the spending), and he'd be supplying a worthwhile program. Who could say no?

But without a track record and references, Gruenberg found that U.S. high schools weren't easy to sell. "We wanted access to the top decision maker -- the principal as opposed to a business manager or activities manager," he says. It only made sense, he felt, to go after the person who had the power to assign faculty advisers; a good adviser, he thought, could make the difference between a successful school program and a dud. Unfortunately, principals, especially in the larger schools he wanted most, weren't easy to see. "In a lot of schools," he notes, "we couldn't get in the door."

When Gruenberg or the other employees did talk to principals, the feedback was often mixed. Many liked the idea of kids learning video -- or so they said -- but how exactly would it work? How much faculty time would it take? How much student time? And how might it undermine the popular yearbook? Because the VideOvation employees' experience with schools was so limited, they didn't have convincing answers. Most principals told them to come back when they did.

By mid-1988, Gruenberg thought the company was finally in a position to describe the program in detail. He and a staff of nine, including three field producers, had been working on an experimental basis with 28 schools; for the 1988-89 school year, they wanted 200 schools. To orchestrate the expansion, Gruenberg recruited a sales manager from a major publishing company who urged, among other things, that VideOvation try teaming up with one of the better-known yearbook companies to help sign up schools. It sounded fine to Gruenberg. He worked out deals with several sales representatives from Taylor Publishing, the number-two yearbook company.

But the experiment was a bust. Gruenberg and others at VideOvation succeeded in getting renewal commitments from 25 of the 28 existing schools; but just 18 new schools joined the program, for a total of 43. "Only 4 or 5 of the new schools came from the yearbook reps," Gruenberg says. The problem, he feels, was one of access. "[The reps] didn't know principals -- they knew yearbook advisers, many of whom were threatened by our product." Whatever the problem, it cost the company both time and money. With schools, he now knows, you need to have agreements negotiated by late spring or be prepared to wait another year.

On the theory that the wrong contact can be worse than no contact at all, Gruenberg and Bob Carl, a video-industry consultant, spent several months trying to identify other possible marketing partners. The question they asked over and over: who had the principal's ear? They thought about suppliers of such products as class rings, caps and gowns, even athletic equipment; yearbook companies weren't even considered, Gruenberg says, because of their perceived lack of interest. Finally, just before Thanksgiving in 1988, they zoomed in on a company named QSP Inc., whose business is school fund-raising.

As the country's leader in the field, QSP, a Reader's Digest subsidiary in Ridgefield, Conn., specializes in helping principals raise money for everything from school equipment to team uniforms to class trips by getting students to sell magazine subscriptions, food, and gifts. Its field managers knew little about video. What they seemed to have -- and what Gruenberg hopes to tap -- is access to the top. Gruenberg is wagering that QSP field managers will be able to parlay their contacts and credibility into commitments from principals to participate in the VideOvation program. What began as a trial relationship was extended in June 1989 for one year; a new two-or three-year contract was being negotiated in March.

With the presence of a marketing partner, VideOvation is essentially out of the business of courting principals itself -- and happily so, says Gruenberg, pointing to recent gains. During the spring and summer of 1989 fewer than 20 QSP field managers signed 85 new schools (double the company's previous clientele). This year QSP has assigned a lot more reps -- about 150 -- and Gruenberg thinks it may sign 350 new schools by August. In addition to the East Coast from Maine to North Carolina, QSP will be targeting northern California, Illinois, Missouri, and Minnesota. "We're starting to get calls from principals who've heard about us from other principals," Gruenberg says.

Flattering as Gruenberg finds this, he is developing a set of criteria to make sure that schools aren't too costly to service. Among them: the size of the school (he wants to concentrate on high schools with no fewer than 900 students, where the opportunities for selling tapes is greatest); and where schools are located in relation to other VideOvation schools (the company is trying to cluster them in metropolitan areas in groups of at least 30).

Selling tapes: The arrangement with QSP also provides VideOvation with new capability for selling tapes, which ultimately is -- and will always be -- the single most critical variable in this kind of business, says Gruenberg. He explains that producing a school tape costs about $2,350 before you make the first copy. The copies themselves, however, are ridiculously cheap; each copy costs about $4.80 for copying, labeling, and packaging. Commissions can run as high as $9 per tape. To break even, VideOvation needs to sell around 150 tapes at $29.95 at every school; whatever it sells above that is gravy.

Back in the days when the company was handling tape sales itself, the results were unpredictable and usually disappointing. Selling tapes was largely up to the individual field producers, who, with all their technical responsibilities, were spread thin. Sometimes they came close to breaking even by selling 100 or 150 copies (about 10% or 15% of a single school's potential market); other times, Gruenberg says, they'd sell fewer than 25 videos. "We'd spend all that money and get nothing back."

Now that QSP is running sales, the chances of getting stuck with a low-volume tape have all but disappeared. Before signing a school, notes John Davis, QSP's VideOvation product manager, field managers are expected to do as much as possible to cover their risks. First, they ask principals to guarantee purchase of 200 tapes. Failing that -- and only a small percentage have said yes -- they ask the principal to commit to holding at least one assembly that all students are required to attend, the sole purpose of which is to introduce the video program and to book orders. "QSP's business," Gruenberg says, "is running sales events and collecting money." If a principal will not agree to the assembly or if the event and follow-up activity don't generate sufficient orders (the target is 125 paid orders by October of the school year), the company may decide to walk away. "Our attitude," says Gruenberg, "is that the students have to indicate a tangible interest, or we can't afford to be there."

The commissions VideOvation is prepared to pay are nothing to sneeze at. But the benefits over handling sales internally, Gruenberg says, are becoming obvious not only in the speed with which VideOvation can get its hands on cash, but also in the overall acceptance of the product. "We used to struggle to get 10% of a student body. But now we only have a few schools under 20%, and a number are over 30%." In two or three years, Gruenberg thinks penetration in many repeating schools will exceed 40%. "We used to have a sales manager," he notes. "But we've recently let him go. Under this setup, he wouldn't have anything to do."

Videovation operates out of a 5,500-square-foot office in a renovated parochial girls' school on the fringes of the University of Pennsylvania campus in Philadelphia. Its sparsely furnished space, which it rents at a below-market rate of $8,000 a month, is fitted with four fully equipped editing suites. The suites are staffed by free-lance video editors; rather than paying them by the hour, the company attempts to control its expenses by paying them a flat $1,000 for every master tape they edit.

The company payroll numbers 19, counting Gruenberg -- 10 are field producers assigned to the 118 schools VideOvation currently works with; the others are a vice-president for production, a production manager, a director of field operations, a managing editor, a producer, two secretaries, and a part-time controller. Payroll and other fixed expenses run about $80,000 per month, Gruenberg says.

Based on current levels of operations, Gruenberg expects to lose $882,000 on revenues of $577,000 during the 1989-90 school year. But sometime in the next 12 to 18 months, he expects to flip from losses to profits. The shift to profitability on a cash-flow basis will be achieved, he explains, by signing more schools, getting higher market penetration within schools, and lowering overhead by operating more efficiently.

With 118 schools, fixed costs don't get spread out much. But VideOvation could handle a lot more business, Gruenberg claims, at only modest incremental expense. Another 80 or 100 schools (which would generate a minimum of $395,000 in revenue), would be easy to absorb, he says. By adding extra shifts and hiring more free-lance editors, the company could get by with its existing editing equipment. Almost all the other staffing is already in place. "The most we'd need is two additional part-time clerical people," he says.

Gruenberg used to think that it would take around 375 schools generating revenues of about $2.2 million to reach break-even on a cash-flow basis -- something he felt could be achieved during the 1990-91 school year. That goal was based on the assumption that the average penetration rate at high schools would be about 26%, that field producers would handle 20 schools, and that the equipment package would run about $1,150 for every school. But in recent months he's been pushing downward the number of schools needed for break-even, and he thinks it may go lower still.

As QSP field managers refine their selling techniques, the 26% penetration rate may be conservative, Gruenberg says. "At 30%, we'll only need around 300 schools." What's more, if the new schools are located close to one another, field producers may be able to handle more schools -- perhaps more than 30. The company is negotiating with manufacturers of cameras and editing equipment for discounts or free equipment; it currently gets free tape from 3M Co. Gruenberg is also considering the sale of paid on-tape advertisements, which would drive costs even lower. "We're working a lot of angles -- controlling costs and boosting penetration are the name of the game."

Gruenberg, who owns 26% of the business, admits that it's taken more time and more money to crack the market than he expected. In March, VideOvation was preparing to borrow $500,000 from its investors, who had already supplied $3.3 million in equity, to cover the anticipated cash shortfall for the next few months. Before the business becomes self-funding, Gruenberg figures he may need at least $1 million more. "How much we need really depends on what happens in the schools this spring." The student sign-up rate, the location of the schools, and whether the company can get breaks from equipment suppliers -- each will tell part of the story.

Gruenberg says he's watched competitors of all types -- from small independents to the big yearbook publishers -- enter the video market. But he claims he isn't worried. "There is a huge number of schools out there. So there's plenty of room for three, four, even five viable competitors."

He's banking, too, on a loyalty factor: once a school has worked with VideOvation and is happy with the results, he doesn't think it will change. "We're building barriers to entry for other companies whenever we sign and re-sign schools. Rather than steal our schools, they'll try to find new ones of their own."

And what about competition from schools that think they can make their own tapes? Gruenberg thinks that it's inevitable. But not many will actually do it -- not when they figure out what's involved. Editing, he says, takes an enormous amount of time, which neither busy students nor their overworked advisers have -- not to mention equipment and expertise. And who would do the packaging and selling? For uncertain benefits, he claims, few schools will want to take on the burden.

"We give students maximum creative control over the product without any of the back-end hassles." In the end, he hopes this approach will feel right to both principals and students. The future of his business depends on it.

* * *

Research assistance was provided by Leslie Brokaw.

EXECUTIVE SUMMARY

THE COMPANY: Gruenberg Video Group Inc., d/b/a VideOvation, Philadelphia Concept: Sell a video-production package of equipment, training tapes, and field support to middle and high schools to produce a video yearbook

Projections: Losses of nearly $1 million in 1990; projected earnings of $1.1 million on sales of $7.9 million in fiscal 1992

Hurdles: Achieving market penetration with outside sales force; covering anticipated $1-million cash shortfall before break-even; overcoming reluctance of school principals to invest students' and faculty's time in production

College degrees: B.A. from Lake Forest College; master's in management from Yale

Typical workweek: 65 hours

Last vacation: A week in Maine last August

Favorite hobby: Formula Ford race-car driving

Why I'd quit: When it's no longer fun or if the initial assumptions about the market don't stand up

FINANCIALS

VideOvation Projected Operating Statement

(in thousands) Fiscal 1990 Fiscal 1992

Net video yearbook sales $563 $7,841

Interest income 14 61

TOTAL REVENUE 577 7,902

Cost of goods (copying, packaging) 82 952

Commissions 136 2,260

Total cost of sales 218 3,212

GROSS PROFIT 359 4,690

Percent gross profit 62% 59%

OPERATING EXPENSES

Other marketing & selling costs 89 53

Field producer salaries, travel 193 1,280

(in thousands) Fiscal 1990 Fiscal 1992

Editing, postproduction 200 1,004

Headquarters

Staff salaries, benefits 375 725

Building occupancy, other G&A 191 202

Depreciation 96 309

TOTAL OPERATING EXPENSES 1,144 3,573

Interest expense 97 0

NET INCOME BEFORE TAXES (882) 1,117

Percent net income before taxes -- 14%

Number of schools 118 833

Tapes sold at each school 145 286

Total units 17,110 238,238

WHAT THE EXPERTS SAY

CUSTOMER

RICHARD DuFOUR

Principal/assistant superintendent, Adlai Stevenson High School, Prairie View, Ill., with 1,900 students and no video yearbooks

I like the effort the company has made to involve students in the creation of the video and that it's created an actual curriculum -- because principals always have to ask, "Is there an educational component to this?" If I were one of their sales reps, I'd really push that.

I think the biggest problem VideOvation will have is its assumption that it's not cutting into the yearbook market. From the point of view of yearbook faculty advisers, that's not the case. They'll see it as a real threat to student interest in working on the traditional yearbook. We've had a couple different video companies try to pitch us, and our yearbook adviser was not in favor of it at all.

No principal in his right mind would guarantee the sale of 200 videos. And getting a principal to allow an all-student assembly to demonstrate this video is pretty unlikely, too. Just look at the controversy Chris Whittle got into by offering 10 minutes of news a day, free equipment, and televisions in every classroom in return for two minutes of commercials. There's a hue and cry about that. Imagine a principal saying, "Yeah, I'll take instructional time to have an entire student body sit as a captive audience for a sales pitch on this commercial product." Not many right-thinking principals would agree to that.

A better approach would be to simply offer this as a flat-out fund-raising activity. To let, say, the junior class sponsor it. Then you charge $35, and the students keep $5. If the kids felt they could sell 200 or 300 videos, that's a lot of money, more than they'd make selling candy or pennants. Getting student leaders and a class adviser saying, "We can make this work," and approaching the principal would be a better marketing strategy.

What the company did right was hook up with QSP. It went with somebody who really knows the school establishment and has the sales force to go and talk to principals. QSP's got a good reputation; it's a good organization for fund-raising, and it's trustworthy.

I know that yearbooks are not looked on as a way to make money, but reading all this I wonder, What does a school get out of this? These days a lot of school people are saying, "Why should we be doing it unless we get 50%? Why should we try to make you money?" If Gruenberg is looking for a partnership with the schools, he may have to let them make money on it.

The company should consider offering varied services, not just one package. Some schools already do a fantastic job with video and may think, "We can't print our yearbooks, but we can probably edit our videos." They may not be top quality, but may be just good enough. So if schools have their own equipment, the company could provide training; yearbook companies, for example, hold workshops. Then even if schools get more sophisticated, they don't have to dump you.

Operating in the school market takes a lot of patience, and I think Gruenberg is finally beginning to see this. He's figuring out who to talk to, although in my experience the buying decision isn't very often made by the principal.

Structurally, I think he's making a mistake by having two sets of people -- field producers and outside sales reps -- servicing the same schools. At this point, it's important that schools build loyalty. They're going to be working most closely with the field producer, and that person should have a very big stake in seeing to it that the school is happy and gets renewed. In the yearbook industry, sales reps handle both sales and service; their necks are on the line to get schools renewed.

Editors can make or break you in the quality of the final product. Gruenberg's chosen to use free-lancers to keep costs down, but because he pays them a flat rate for the tapes they edit, the incentive isn't for quality but speed. If they can do something in 10 minutes, I doubt they'll spend an extra half hour to make an OK tape into a really great tape.

In terms of the overall market, I think he's optimistic. I doubt if we're talking about a $500-million market -- it will probably be closer to $250 million or $300 million. The number of schools he hopes to sign is doable. But getting penetration within schools is going to be harder than he thinks. I think this will be a slow-growth industry in terms of unit sales.

FINANCIER

KEVIN DOUGHERTY

General partner, The Venture Capital Fund of New England, Boston, who in his former capacity as a commercial lender worked with yearbook companies

Gruenberg thinks they now have the right way to sell -- and they might. But I'm skeptical. Whenever you rely on an outside group whose business is different from yours to do the sales, you have to worry about whether the partner will give it the attention it requires -- and whether its interest will be diverted to something else next year. We see it all the time in the high-tech field: something looks like a natural add-on product for a third-party selling organization, but it doesn't always pan out.

Is QSP's expertise the kind VideOvation needs most? QSP's business, as I understand it, is helping schools set up fund-raising drives; its bread and butter is really teaching sellers how to sell. To help VideOvation inside schools, it will have to get buyers to buy. Yearbook and ring companies already know how to do this, but I'm not sure QSP does. It's a very different skill, and it makes me wonder whether the company will get the penetration it expects.

I give Gruenberg a lot of credit for being flexible. He's been sharp enough to see what hasn't worked, and he's changed his marketing focus a few times. He hasn't been dragged down by a strategy that wasn't clicking.

Will he succeed? I don't take a lot of comfort in his financial projections. Investors already have more than $3 million in this business. If I were Gruenberg, I'd do what I could to make sure expenses are held down until revenues develop. If he can do that and react to what's happening in the market, I think he can survive. But I have real questions about whether this will be a $20-million business in three or four years, which is what it would have to be to justify all the investment.